Reams v. Vrooman-Fehn Printing Co.

Decision Date05 April 1944
Docket NumberNo. 9573.,9573.
Citation140 F.2d 237
PartiesREAMS, Collector of Internal Revenue, v. VROOMAN-FEHN PRINTING CO.
CourtU.S. Court of Appeals — Sixth Circuit

W. F. Wattles, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, J. Louis Monarch, and Paul S. McMahon, all of Washington, D. C., and Don C. Miller and F. B. Kavanagh, both of Cleveland, Ohio, on the brief), for appellant.

Gustavus Ohlinger and Arthur E. Schroeder, both of Toledo, Ohio, (Arthur E. Schroeder, Zachman, Boxell, McCreery & Schroeder, Gustavus Ohlinger, and Beckwith, Ohlinger, Koles & Wolf, all of Toledo, Ohio, on the brief), for appellee.

Before ALLEN, HAMILTON, and McALLISTER, Circuit Judges.

HAMILTON, Circuit Judge.

Appellant, Collector of Internal Revenue, pursuant to statutory authority (Internal Revenue Code, 26 U.S.C.A. § 3612) made returns and assessed against the appellee $22,488.41, the aggregate of delinquent taxes, interest and penalties claimed to be owed by appellee under the Federal Insurance Contributions Act, Internal Revenue Code, 26 U.S.C.A. chap. 9, sub-chap. A, § 1400 et seq., 53 Stat. 175, and the Federal Unemployment Tax Act, Internal Revenue Code, 26 U.S.C.A. chap. 9, sub-chap. C, § 1600 et seq., 53 Stat. 183.

Appellee is an Ohio corporation and from January 23, 1914, to and including June 1, 1937, was engaged in the job printing business in which it used buildings, machinery and equipment, all of which it owned. For the calendar year 1930, and subsequent years until June 1, 1937, appellee's business was unprofitable and on April 21, 1937, all of its stockholders (being five in number) by appropriate corporate action, determined to discontinue its business and lease its physical assets including its customer's list. In May 1937, appellee gave written notice to its customers, suppliers and employees (about thirty-two in number) of its intention to terminate business June 2, 1937.

April 14, 1937, sixteen of appellee's employees and stockholders formed a limited partnership under the laws of Ohio. June 1, 1937, this partnership leased from appellee for a period of one year its plant and equipment, and during said year continued the business as a going concern. On the termination of this lease, the partnership dissolved and June 1, 1938, fifteen or sixteen of its members formed a general partnership and acquired a new lease from appellee for a period of one year, the latter lease being of the same effect and tenor as the earlier one. Each lease provided that "in order to accomplish the financial responsibility of the partnership as a whole, to unify the efforts of all the individual partners and to provide a duly authorized agent for the conduct of the business of the partnership with other persons, Seaman G. Vrooman," president and majority stockholder of appellee, was designated senior partner vested with sole authority to act on behalf of the partnership.

The consideration for each of the leases was that the lessee would maintain the buildings and machinery covered by the lease in good condition, pay all taxes and assessments on the property, all insurance premiums and would pay to the lessor an amount equal to the depreciation accruing upon the buildings and equipment during the tenure of the leases, the rate of depreciation being equivalent to that claimed by the lessor in determining its income and excess profits tax liability. The lessee covenanted to carry on continuously the job printing business as theretofore conducted by appellee and that within ten days after termination of the lease the lessee would pay to the lessor in addition to the depreciation reserve, a sum equal to fifty percent of all funds accruing to the partnership during the year, less partnership liabilities and $38,800 which sum was to be distributed to the partnership members as the interest of each partner appeared under the partnership articles.

The respective partnerships filed employers' tax returns with the Collector of Internal Revenue for the Tenth District of Ohio, at Toledo, Ohio, under Titles 8 and 9 of the Social Security Act, 26 U.S.C.A. Int.Rev.Code, §§ 1400 et seq. and 1600 et seq.) and paid all taxes shown to be due on said returns and the Collector for the district was promptly advised that appellee had ceased to conduct the business under its corporate name. The partnerships also, in accordance with the requirements of the Unemployment Tax Act of the State of Ohio Gen.Code, § 1345-1 et seq., likewise prepared and filed all required returns and paid the taxes appearing due and payable to the State of Ohio.

Sometime prior to August 5, 1941, the Field Agents of the Treasury Department examined the books and records of the appellee and also of the partnerships and on February 24, 1942, the Treasury Department advised the appellant Collector of Internal Revenue that in the opinion of the department appellee was the employer of all the employees of the so-called partnerships and the individual members. Acting under the directions of the Commissioner of Internal Revenue, appellant, prior to May 11, 1942, prepared returns in appellee's name for the tax periods from June 1, 1937, to and including March 31, 1942, under Titles VIII and IX of the Social Security Tax Laws and requested appellee to execute said returns which it refused to do and thereupon assessed appellee with the taxes, interest and penalties for the periods involved and demanded payment which appellee refused. Subsequently, appellant made other returns in the name of the appellee for the period from June 1, 1937, to and including March 31, 1942, and followed the same course as with the previous assessment, and with a like result.

On May 13, 1942, appellee filed with the Treasury Department abatement claim for the deficiency taxes assessed May 11, 1942, which claim is still pending.

Appellee filed this action July 27, 1942, seeking to enjoin the collection of all of the assessments herein described because illegal. The court granted the relief prayed, hence this appeal.

Appellee owns buildings, machinery and equipment of a value of more than $60,000 without encumbrances. At the date appellee filed its petition, its current indebtedness was $2,291.86 and it had on hand cash of $5,479.70. Appellee has attempted to borrow a sum on its unencumbered assets sufficient to pay the taxes, interest and penalties demanded of it by appellant but has been unsuccessful.

The principle that a taxpayer may not bring a suit in equity for the purpose of restraining the assessment or collection of a tax has long existed. Public necessity gives the rule vitality. The Internal Revenue Code, 26 U.S.C.A. § 3653, codified the limitation upon the equity powers of federal courts to restrain the collection of taxes and fortified the policy of allowing the government to be unhampered in the collection of its revenue. No independent equity jurisdiction appearing, the statute applies, even where the collection or assessment of the tax is unwarranted. Graham v. Dupont, 262 U.S. 234, 43 S.Ct. 567, 67 L.Ed. 965; Keogh v. Neely, 284 U.S. 583, 52 S.Ct. 39, 76 L.Ed. 504. Unless there is a clear showing that a taxpayer will suffer a wrong without any other remedy, neither the validity or accuracy, nor the constitutionality of a tax may be tested in an action brought to restrain its collection only and it is immaterial that the collection of the tax is wholly void or that the object sought to be taxed is beyond the purview of the taxing statute. The concept of the statutory prohibition against the injunction is what the revenue statutes prescribe a complete method for the ultimate determination of the correct tax and that since the taxpayer has a proper remedy thereunder, the courts will not interfere with the summary collection of the taxes.

U.S.C.A., Int.Rev.Code, Title 26, Section 1400, provides in substance that social security taxes shall be levied, collected and paid upon the income of every individual equal to a percentage of the wages received by him. Section 1401 requires that the employer of the taxpayer shall collect the tax of the employee and deduct the amount thereof from his wages when paid and that the employer shall be liable for the payment to the Collector of the taxes so withheld. Section 1430 makes applicable to the Social Security Act all provisions of law including penalties applicable under the Internal Revenue Code, 26 U.S. C.A. § 2707.

Appellee insists that since it is not the "taxpayer" under Section 1401, the exactions demanded of it by the appellant are not taxes and that therefore Section 3653 is inapplicable to so much of the alleged taxes in question as are due and payable from its so-called employees.

The Internal Revenue Code, 26 U.S.C.A. § 3797(a) (14), defines the term "taxpayer" to mean any person subject to a tax imposed by this title. Any person liable for a tax is subject to a tax and comes within the statutory definition of a taxpayer. The purpose of the statutory prohibition against injunction is the avoidance of vexatious injunctive suits interfering with the governmental in collecting revenue for governmental purposes and the force of the statute would be dissipated if it were made inapplicable to the person whose statutory duty is to pay taxes, although such taxes were collected by the payor from another taxpayer.

Appellee also urges that the prohibitive statute has no application to the interest and penalties assessed against it by appellant, relying on Lipke v. Lederer, 259 U.S. 557, 42 S.Ct. 549, 66 L.Ed. 1061; Regal Drug Corporation v. Wardell, 260...

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